Finalizing Transaction -- Tax Counsel suggests I'm not paying enough
June 15, 2022
by a searcher from Cornell University in New York, NY, USA
I'm in the final stages of a transaction to acquire a partnership stake of a business. Tax counsel is advising that the transaction price is too low. Tax counsel recommended a formal business appraisal after referencing last year's company profits (excluding owner/operator's full time salary). I'm building my own model for the valuation -- am curious if there are considerations I'm missing for deciding on transaction price.
I think I'm paying fair price if I include the seller's full time salary as owner operator and the business risks in the operating model. I'm curious if I'm missing anything by skipping a professional business appraisal. E,g. is there any effect on a future sale transaction? Is the professional appraisal required? Since this is a transaction between third parties, price is valid as long as it's agreed on by both buyer and seller, correct?
from The University of Chicago in Chicago, IL, USA
2. As others have said, price is what two parties agree w/o being under pressure.
3. Even though yu are partial ownership interest, you are responsible for the pro-ratea lianilities,
4. I do not understand 1.3x SDE. .Is that for the partial ownership or for 100%?
5. First reaction of 1.3x SDE is that it is too low. But the same 1.3xSDE may be actually high. Say, SDE is 100. You value shares (100% ) at 130. If the business net debt is 2000, then the EV is 2130, which is 21.3x SDE.
These are just few of the many thoughts. Got your email. Happy to talk more.
from Walsh College of Accountancy and Business Administration in Detroit, MI, USA
Cash price alone is not determinative; you also need to take into account assumed liabilities. About 15 years ago my client bought a large manufacturing company for $1.00. The Target was saddled with a lot of debt and they stepped into it, They did turn it around and had a nice exit 5+ years later.